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Fear breeds fear: Fed got nervous and the market tanked


The S P options pit Chicago Board Trade Thursday just before closing bell. | Rich Hein~Sun-Times

The S&P options pit at the Chicago Board of Trade on Thursday just before the closing bell. | Rich Hein~Sun-Times

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Updated: May 3, 2013 12:15PM



‘Never let them see you sweat!” It was a great advertising campaign for a deodorant. And the Fed should have taken that advice .

Nothing in the global economy changed overnight. But when the Fed announced it was tinkering with the interest rate structure because it saw “significant downside risks to the economic outlook, including strains in global financial markets,” the stage was set for mass fear.

The Dow fell 391.01 points, or 3.5 percent, to end the day at 10,733.83. The Nasdaq composite fell 82.52, or 3.3 percent, to 2,455.67. The Standard & Poor’s 500-stock index fell 37.18, or 3.2 percent, to 1,129.58.

The Fed rarely, if ever, comments on global financial markets. And if the Federal Reserve Bank of the United States admits it is worried, then every other banker, lender, and investor on the planet should be worried. The results showed up in all global markets.

Fed flinched

Had the Fed merely restated its previous economic concerns, but left policy untouched, the markets would have yawned. But the Fed flinched.This time the Fed was specific about its worries. For the first time in recent years, the Fed’s statement referred to its

dual mandates of low inflation and maintaining full employment. In other words, the Fed was acting because it was worried about jobs.

And the Fed specifically said it would take action to try to depress long-term interest rates to help the mortgage market — a recognition that housing continues to be in a depressed state. While it is doubtful that a slightly lower mortgage rate will have much impact, the very fact that the Fed is making this move indicates their increasing concern.

Market madness

The markets reflect one great fear — a global recession, which would impact the entire financial system. Everyone rushes for safety. And these days “safety” is defined as “cash” — and specifically U.S. dollars, in very short-term government Treasury bills. No one wants to own anything “risky.”

Selling begets more selling — at much lower prices. And lower prices beget margin calls. And that means even the “good” investments have to be sold to raise cash to meet the calls. Thus, the sell-off in dividend-paying blue chips — and even in gold.

This is the same “madness” that causes people to buy irrationally at the top of markets. Now we are seeing the opposite side of that coin.

Fear and greed can move markets to extremes that have never been anticipated. And volatility — the speed that reflects these swings of emotion — is now enhanced by our ability to transmit our emotions into action almost instantaneously.

Step back, gain perspective

Ten years from now, when you start withdrawing your retirement assets, you won’t be remembering today’s headlines. America will have moved on, in new directions, to a new definition of prosperity. You can be part of that only if you have at least a portion of your funds invested for that future.

Can you take that risk? “Risk is the price you never thought you’d have to pay.” And that’s The Savage Truth.

Terry Savage is registered investment adviser



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